Stock Fundamentals

Getting it REIT

Bavadharini KS | Updated on October 13, 2019 Published on October 13, 2019

Investors can cash in on the buoyant commercial market

The commercial market (office space, hotels and malls) has registered double-digit rental growth despite the turbulent realty market conditions. The demand for quality office space and presence of organised players in the market have helped the commercial space grow.

In this regard, Embassy Office Parks REIT (real estate investment trust), whose commercial properties are among the largest in the industry, has emerged as an alternative investment option for investors looking to cash in on the buoyant commercial market. The stock has generated over 25 per cent return in a span of six months, since its listing this April.

The REIT has 11 commercial offices space with over 94 per cent occupancy and multiple projects under various stages of construction; 90 per cent of Embassy’s commercial properties have already been generating income. Investors can consider parking their money in Embassy REIT with a time horizon of two to three years.

The company is able to maintain an 81 per cent client retention rate for the last three years, mainly due to long-term lease contracts. With the demand for office spaces expected to remain high, the company should be able to improve its client base and grow from contractual escalations and re-leasing and new lease of vacant space.

Stable commercial portfolio

Embassy REIT has commercial properties across key cities, including Bengaluru, Mumbai and Pune, generating over 89 per cent of revenue. While its presence in the hospitality segment (hotels) generates revenue of 4 per cent, other segments such as energy and facility maintenance contribute 7 per cent of revenue.

Paucity of office spaces in key cities works out to the advantage of Embassy. As of June 2019, it had about 24.8 million sq ft of (completed) commercial assets with 94 per cent occupancy.

The demand for office spaces is driven primarily by IT/ITeS and sectors such as financial services and e-commerce. In this regard, Embassy has over 165 clients, of which nearly half are IT and technology companies, including IBM, McAfee, Google and Cognizant. Overall, the average lease tenure is five to nine years with three to five years as the initial commitment. Stable and quality client base — most of which are Fortune 500 companies — should keep the company’s growth in good stead.

In the June 2019 quarter, Embassy REIT let out 5.95 lakh sq ft of new leases. Of this, expansion by existing tenants accounted for 57 per cent of the office space taken up. The company’s average (across its commercial spaces) rent works out to be ₹65 per sq ft per month. While it is lower than the market average of ₹85 per sq ft per month, it helps in drawing clients. It also offers the company enough scope to increase its rentals in future. As such, Embassy has contractual lease escalation of 15 per cent every three years.

On the hospitality front, REIT has two operational hotels. Hilton (247 keys) at Embassy Golflinks has over 70 per cent occupancy as of June quarter 2019.

The average revenue per available room for Hilton was at ₹6,230 for the June quarter. Four Seasons at Embassy One (230 keys) was launched in May 2019 and has signed over 60 corporate accounts so far.

Pipeline of projects

The company has planned to construct 4 million sq ft office space over the next four years. Of this, as of June 2019, nearly 1.4 million sq ft of new projects (Bengaluru and Noida) are ahead of the targeted delivery of FY20 by two quarters, as per the company’s report. About 1.9 million sq ft are under various stages of design, excavation and pre-construction.

The company is also upgrading its existing office infrastructure to improve competitiveness. For instance, it is constructing a flyover at Embassy Manyata to connect its property to the main road.

Wide client base across sectors, stable lease agreements and better infrastructure are expected to aid in the lease and rental growth of Embassy REIT. For instance, infrastructure improvement such as the Metro system around Noida-Greater Noida Expressway has aided the demand for office space at the Embassy Oxygen project. The company has let out 2.46 lakh sq ft of space to MetLife, a Fortune 500 company. This project is expected to be completed in Q3FY20. Further, two hotels with 619 keys are under development and expected to completed by Q3FY22.

Financials

Embassy REIT reported revenue of ₹535 crore, up 19 per cent Y-o-Y in the June quarter. Lease escalations contributed 60 per cent of revenue, new lease and lease renewals brought in 30 per cent, and amenities the rest.

The net operating income margin was 82 per cent, the same as in the year-ago period. Debt-to-equity ratio is at 0.11 times.

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Published on October 13, 2019
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